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HOA Super Lien and Colorado Foreclosure Laws

What is an HOA?  As stated in our article ‘Heads up on HOAs’, we described an HOA as any covenant-controlled community, whether it is a condominium or townhome community or a single-family development.  To further our definition, HOAs have a Board of Directors and an elected group of representatives responsible for writing, updating and enforcing the rules for the properties in its jurisdiction.  The HOA and its representatives are tasked with overseeing the maintenance and upkeep of the common areas and for ensuring the homeowners abide by the covenants and restrictions of the community.  Additionally, they are responsible for collecting the monthly fees assessed to each individual unit owner or homeowner in the community to provide for the common area maintenance, services and insurance.

Since El Paso County, Colorado and Colorado Springs ranked number one in the highest number of complaints issued against HOAs in 2011, we feel the subject of HOAs warrants more attention.  While complaints from homeowners have increased, so have the HOA collection measures for past due assessments and the placement of liens against the properties for non-payment.

In every state, homeowners associations have the right to record a lien against a property for unpaid HOA assessments and associated costs.  However, only about 20 states have a ‘Super Lien’ law.  Colorado is one of those 20 states!

What is a Super Lien?  In Super Lien states like Colorado, the HOA lien is given priority over the first mortgage and the second mortgage, if there is one, and any other subordinate liens or judgments on the property, regardless of when the lien was recorded.  In non-super lien states, an HOA lien is typically a subordinate lien, or junior lien, to the first mortgage.  This means that if the first mortgage forecloses, the first mortgage lender receives payment first.  However, the Super Lien law grants the HOA lien priority over the first mortgage.  Therefore, if any lien holder forecloses, the HOA will be repaid first.

If a property owner is responsible for paying HOA fees but does not pay them, the homeowners association can place a lien on the property for all unpaid assessments, interest, penalties, late fees, attorney fees, and recording fees.  In many cases, the date liens are recorded determines the priority in which the liens are paid.  In other words, if one lien holder forecloses on the property first, any money that results from the foreclosure sale is repaid to the other lien holders in the order in which their liens were recorded.

HOA priority liens are limited to six months of back dues and any associated costs.  More importantly, in Colorado, if the HOA forecloses before a first mortgage lender forecloses, the HOA not only collects the entire debt owed to the HOA, it also wipes out the first mortgage and any other liens on the property![i]  Therefore, if the first mortgage lender has not started foreclosure proceedings or foreclosure proceedings were stopped or withdrawn, it is a prime opportunity for the HOA to foreclose.

The trend of having HOAs foreclose on a property for unpaid assessments is increasing, however, if an HOA intends to foreclose; a specific process must be followed.  While the Public Trustee in Colorado handles the typical mortgage lender foreclosures, the HOA foreclosure is a Judicial Foreclosure, which is a court order that allows a Sheriff’s Sale of the property.

Judicial Foreclosure process[ii]:

1.  For an HOA to start a judicial foreclosure, a lawsuit in the district court where the property is located must be filed.  The lawsuit is brought against the defendants, which include the owner of the property and all persons who have an interest in the property.  The process starts with a Lis Pendens being recorded against the property to give notice to the defendants and any interested parties that there is litigation pending against the property.

2.  The lawsuit is then served on all defendants and service of the process is obtained.

3.  After the lawsuit has been served, the defendants are given a specific amount of time to file an answer with the court.  If no answer is filed, an order for foreclosure can be obtained by default.  This is sometimes referred to as a ‘default judgment.’  If an owner does file a response, the case will be set for trial in the same manner as other lawsuits.

Once these steps are completed with the court and the parties are notified, if the defendants do not file a response, the process moves toward the Sheriff Sale process.

Sheriff Sale Process[iii]:

The steps in the Sheriff Sale process, are similar to the Public Trustee Sale process, and are outlined below:

1.  After the foreclosure order is issued by the court, the HOA attorney sends the order to the County Sheriff.

2.  The Sheriff then schedules the sale date.  The date of the sale must be at least 110 calendar days from the date the Lis Pendens was recorded.

3.  After the date is set, the Sherriff publishes notice of the sale in a local newspaper and sends notices to each person who has an interest in the property.

4.  The HOA submits a bid to the Sheriff before the sale.  The bid submitted is usually for the amount owed to the association, including past due assessment fees, interest, penalties, late fees, attorney fees and any other costs incurred in the foreclosure process.

5.  The actual sale is held by the Sheriff in an auction format and takes place at the Sheriff’s office.  The highest bidder at the sale receives a ‘Certificate of Purchase’, not a Deed to the property.  If the homeowners association is the highest bidder, it receives the Certificate of Purchase and continues with the foreclosure process.  If it is not the highest bidder at the sale, the HOA receives the full amount of their bid through the court in about two weeks and the HOA is removed from the foreclosure process.  The party who wins the bid receives the Certificate of Purchase and takes the HOAs place in the foreclosure process.

6.  After the sale, if any other lien holder wants to redeem the property they must file their intent to redeem within 10 days after the sale.  There is no owner redemption period in a judicial foreclosure.

7.  If no other lien holder redeems the property, the Sheriff issues a Confirmation Deed for the property to the holder of the Certificate of Purchase.  When the Confirmation Deed is issued, the prior owner is foreclosed on and is no longer the owner of the property.  It also removes any other encumbrances against the property except the first mortgage and any tax liens.  However, in Colorado, if the HOA forecloses before a first mortgage lender forecloses, the HOA not only collects the entire debt owed to the HOA, it also wipes out the first mortgage and any other liens on the property.

Homeowner’s Associations have engaged in several different collection strategies to get property owners current on their HOA fees and to keep them paying.  Previously, not many HOAs have pursued foreclosure, however today; we are seeing more HOAs take this action.  This may be because the attorneys who represent the HOAs are promoting the benefits of the Super Lien position or maybe the HOAs have simply exhausted all other collection methods.  Some of the benefits obtained by the HOAs for pursuing foreclosure are listed below:

1.  Foreclosure is especially useful in getting homeowners to pay their assessment fees so they do not lose their property.

2.  It is beneficial in getting cooperation from repeat and chronically delinquent homeowners.

3.  It sets an example and sends a clear message to other homeowners in the community regarding the consequences of not paying the required assessment fees.

4.  It can result in the association acquiring equity in the property or even the property itself.

Through the foreclosure process, whoever acquires the Confirmation Deed becomes the owner of the property.  The new owner can live in the property, rent it or sell it.  If the previous owner or a tenant lives in the property and does not vacate the property willingly, they can be forced to vacate through the standard eviction process.

Because of the many financial hardships people have faced over the last several years, HOA assessment fees are another bill homeowners struggle to pay.  If a homeowner is faced with having to prioritize what bills get paid, oftentimes the HOA payment is one of the first bills put on the back burner.  This adds to the HOAs challenge of collecting the fees and it puts serious consequences onto the homeowner who is unable to pay.

If a homeowner needs or wants to sell their property, but has a lien placed on the property because their HOA payments were not paid, the property cannot be sold unless the lien is satisfied at, or prior to, closing.  This can cause the owner’s sales proceeds to be reduced by the amount owed or the owner may have to pay money out-of-pocket to satisfy the debt so the property can be sold.

How many homeowners are aware of what can happen if they do not pay their HOA fees?  So many people buy property into communities governed by homeowners associations and are not aware of the rules, regulations and consequences.  You cannot understate the importance of thoroughly investigating and understanding all the covenants and restrictions, rules and regulations, and consequences of buying a home in a community with a homeowners association.

For any real estate agent who has taken on a short sale listing and discovered there is an HOA lien on the property, they know how challenging it can be to get that lien satisfied so the sale can take place.  HOA liens have become more commonplace and they have become more difficult to negotiate.  Homeowners associations have the upper hand, so why should they negotiate?  HOAs have underutilized foreclosure as a collection tool; however, with the growing difficulty in collecting HOA payments, we are seeing an upward trend of HOAs using the Super Lien law and their right to foreclose on the property to collect.

Some communities governed by homeowners associations have very strict rules and regulations while others are more flexible.  Some homeowners prefer the neighborhood standardization that comes with specific guidelines and others prefer more freedom and flexibility.  Regardless of the homeowner’s preference, most homeowners associations come with required assessment fees and if these fees are not paid, the homeowner can suffer devastating consequences.

If you are in the market to buy a home and are interested in communities that have an HOA, be sure to do your homework.  We strongly suggest you hire a knowledgeable real estate agent to work as the agent can help you obtain the documentation you need and make sense of it all.  Additionally, if you are looking to live in a particular neighbor governed by an HOA, be sure you have budgeted in the assessment fees as part of your total homeownership costs.  If you don’t, it could end up costing you your home.

If you are looking to buy a home and need a qualified, experienced and educated real estate agent to help you work through your HOA questions, call Pink Realty.  The agents at Pink Realty are knowledgeable and work with you to find the home and community that is right for you.